Sustainability by any other name

On November 7 last year, French Finance Minister Bruno Le Maire gave the go-ahead to a new version of a set of rules that make up the basis for the country’s so-called ISR label, or sustainable investment label.

Applicable to savings and investment funds, the label currently graces some 1,200 of them, with a total of 770 billion euro in assets under management, per Morningstar.

Many of these funds may lose the apparently coveted label this year. Unless they sell all of their oil and gas holdings. The new ISR rules are essentially the first actual government ban on oil and gas investments.

While the ISR is only applicable for a relatively small class of investment funds it might be a harbinger of things to come. Especially as it comes hand in hand with the EU’s latest push to standardise ESG ratings and the start of mandatory ESG reporting for businesses.

First, a bit of background on the French rules, as provided by Societe Generale: ISR is a tool that was devised in 2016 to essentially certify that a company claiming to be ESG responsible is indeed ESG responsible.

The certification process is rigorous as befits a country notorious for the eleven hells that its bureaucracy is and as befits a transition push that is not going to just happen on its own.

Said process is based on six requirements, all of them unsurprising, all of them equally vague and boring (“Defining the objectives sought”, “Establishing an analysis methodology”, “Building and managing the portfolio”. Need I continue?) and one of them quite cute, namely the last one, dubbed “Evaluate the impact of the approach”.

The requirement itself, in fact, is not cute. It’s just as obvious as the other requirements. The cute part is the impact indicator examples supplied by SocGen, including number of tonnes of CO2 avoided per year and how many trees this amount equals, and output of renewable electricity and how many households’ consumption it is equal to.

That’s candy for the adorable investors and savers who have put their money in a specially certified fund expecting great emission reduction deeds from it. In this candy, it has now become clear, there is an insect and it wasn’t put there by concerned biodiversity loss activists. It was put there by the fund managers. Oil and gas stocks. In abundance.

Per Morningstar, 45% of currently ISR certified funds have exposure to oil and gas. For some of them, though not many, this exposure is above 10%. In absolute terms, the exposure is worth some 7 billion euro, at the moment.

That’s not a whole lot, to be fair, but what happens if the fund operates in more than one country? And what happens if investors in Country B want oil and gas stocks with their ESG funds, please and thank you? A chaos in the making.